Kiss the Rally Goodbye

More upside to come? Not so fast.

We are an optimistic bunch here at the Fool, and I think that's generally a healthy approach to both investing and to life in general. Still, I find some of our contributors' recent arguments for a continued market revival seriously lacking in support.

The basis for fellow Fool Kristin Graham's recent article "The Rally Isn't Done for Good" was a talk given by BlackRock(NYSE:BLK) Chief Investment Officer Bob Doll, so he's really the one I'm taking to task here. This is the same Bob Doll, by the way, who predicted in January 2008 that the economy would skirt recession -- at a Merrill Lynch private client luncheon, no less. The National Bureau of Economic Research later designated December 2007 as the beginning of the recession, and a teetering Merrill has, as you know, since been shoehorned into Bank of America(NYSE:BAC).

Anyway, please check out Kristin's article to get familiar with both the terminology I'll be borrowing and the contours of the argument I will be criticizing.

Not your average snafuOK, first things first: I'm going to go ahead and reject the notion of a 10% probability that we are experiencing a Normal Recession. There is nothing "normal" about a globally synchronized debt-fueled crackup. The last time we saw U.S. household debt-to-gross domestic product ratios hit 100% was in 1929. Such a phenomenon wasn't normal then, either.

I'm pretty indifferent as to how you might allocate that 10% between Doll's remaining Nasty Recession and Deflation/Depression categories, but Nasty is as good as it gets. That may be a difficult conclusion for an asset-gatherer like BlackRock or Legg Mason(NYSE:LM) to draw, seeing as they're in the business of selling investment management services. (These institutions also arguably have little choice but to hold a long bias, given the massive amount of funds they have to put to work.) But let's not kid ourselves. This isn't 1990.

A little short of stimulatingKristin identifies the first of Doll's two areas for optimism as massive stimulus stemming from both government spending and cheaper crude oil. The point about oil is a good one, since falling prices provide relief for everyone from FedEx(NYSE:FDX) to Wal-Mart Stores(NYSE:WMT). Everyone save for producers like Occidental Petroleum(NYSE:OXY), of course.

As far as fiscal stimulus plans, both at home and in places like China, they sound like a lot of money until you look at the financial losses being sustained worldwide. Last year, the International Monetary Fund was talking about $1 trillion in subprime damage around the globe. Now it's more like $2.8 trillion in the U.S. alone -- and more than $4 trillion globally!

Combine that with the determined deleveraging going on -- from the individual household level to the biggest, baddest banking institutions -- and these stimulus plans strike me not only as a drop in the bucket, but also an attempt to bounce back from a bender by drinking a Bloody Mary or two at brunch.

Vexing valuationsI agree that valuations began to get attractive at the March lows, but beyond that point, Doll and I part ways. Take a look at the chart of his expected price targets on the S&P 500 index. In his Nasty Recession scenario, which shows signs of recovery at year's end, the implied multiple to trailing earnings is somewhere between 18 and 21.

Is that really the kind of earnings multiple we should expect to see at the inflection point of an economy that's just been through an economic Pearl Harbor?

Further, I have a hard time reconciling that $50 to $55 range of S&P 500 earnings in 2009 with the $28.51 estimated by the folks who work at index namesake Standard & Poor's. Maybe Doll was talking about operating earnings, which the S&P folks peg as high as $60 and change. In that case, the multiples assigned here would be even more eyebrow-raising when applied to the market's lower, as-reported earnings.

Far from the final wordMaybe it's just me, but I find the urgent desire not to miss a recovery rally, or even a new bull market, to be a bizarre one. Much more pressing was the need to protect wealth in the face of this partially foreseeable pickle we find ourselves in. Some firms, like Odyssey Re(NYSE:ORH), managed to do exactly that in 2008.

By and large, though, fools and Fools alike failed to get fearful when it counted. Now we're worried about whether we can catch another 15% to 20% rise in the market? No matter how long we've been at this business of investing, we all have a lot to learn.